Chipotle’s 50-for-1 stock split is coming. Here’s what investors need to know

High-profile stock splits are all the rage, it seems. Just days later Nvidia split its shares 10-for-1, Broadcom announced that he would follow suit. In fact, some big names are choosing to share theirs this summer. After Nvidia’s stock split, perhaps the most anticipated is the fast-food restaurant pioneer Chipotle (CMG -0.52%).

Shares of Nvidia are up about 10% since the split was executed on June 7. Can Chipotle investors expect a similar rise in stock price? Let’s go over some basics first.

Here’s how Chipotle’s split will work and what it could mean

A stock split, or more specifically a forward stock split in this case, is when a company issues new shares to shareholders, increasing the number of shares on the market. The stock then starts trading at a lower price. It is made proportionally so that the total value of an investor’s portfolio does not change.

So in the case of Chipotle’s 50-for-1 split, each shareholder will be issued an additional 49 shares for each share they own after the market closes on June 25. They now have 50 times the shares they had before. However, they are not suddenly 50 times richer; instead, when the markets open the next day, the stock is 50 times cheaper than the day before.

So the move itself doesn’t directly affect the value of a portfolio, but it can affect it down the line. The price cut removes a barrier for many retail investors to own shares of the stock, allowing more volume and money into the market. This certainly has the potential to positively impact the stock price, but not necessarily. Don’t count this as a guarantee that just because Nvidia stock went up after the split, Chipotle will too.

Besides, this is short-term thinking; don’t get lost trying to time the market. Instead, focus on long-term company value.

So is Chipotle a good long-term play?

Chipotle is smoking its peers in growth

There are many options in the quick service restaurant (QSR) market. Chipotle has to compete with players like McDonald’s AND Yum!, owner of chains such as KFC and Taco Bell. Over the past few years, Chipotle has been growing revenue at a seriously impressive rate. See the difference in this table.

CMG Revenue Data (TTM) according to YCharts

And the strong growth has been sustained even during difficult times in the largest market. In 2020, the year when restaurants were hardest hit by the COVID-19 pandemic, Chipotle still managed to grow revenue by more than 7%. McDonald’s revenue shrank by more than 10% in the same year. Showing resilience and resourcefulness in times of crisis is not something to be taken lightly; it speaks to the solid leadership of the company.

This growth looks set to continue. The company expects to grow earnings per share (EPS) by about 53% for 2024 compared to 2023. That’s about four times the growth expected by McDonald’s.

There are several reasons to be cautious

Chipotle certainly has a lot going for it, and its growth cannot be denied. However, there are some aspects of the business that do not look so rosy. The incredible revenue growth was driven primarily by the expansion of locations. If you look at comparable-store sales, the company saw a 7% increase for the first quarter of 2024, or about half of the top-line growth for the same period.

Its stock is also valued significantly higher than McDonald’s and Yum! in relation to her current income. Investors are counting on its growth to continue to justify the valuation. If that growth stops or starts to moderate, suddenly that premium may not seem so justified.

Even with that in mind, I still think Chipotle is a good bet for the long term. Keep an eye on that comparable store growth, though. That’s the number the company will need to be able to run when it’s not opening so many stores.

Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.